How much should I pay for a seller's remodeling?
You should expect to pay a premium for a house that's in excellent condition, but you should avoid the temptation to overpay. Sellers will often try to justify a high price for a home they have put a lot of money into. But in most cases, sellers can't expect to recoup dollar for dollar on renovations they have made to a property. Generally, sellers will recoup less of their investment on recent renovations than they will on remodeling that was done several years ago. This is particularly the case if home prices in the area are stable.
Renovations that add the most value are remodeled kitchens and bathrooms. These can return from 75 percent to 100 percent of the investment at the time of sale. This is not a guaranteed return, however. How much a buyer will be willing to pay for a renovation will in part depend on how well the job was executed and the quality of the materials used.
Another key element is how well the remodeling integrates with the overall style of the house and the neighborhood. A remodeling that looks out of place can actually diminish the value of a property.
A third bedroom addition to a house that only had two bedrooms will pay back well. So will the addition of a second bathroom to a house that only had one bathroom. But a seller can't expect to recoup as much from the addition of a fifth bedroom to a four-bedroom house, or from adding a fourth bathroom to a house that had three.
Renovations that improve the indoor/outdoor living of a house usually have a high-return value. This might include adding French doors and a deck off the kitchen of a house that has no direct yard access. Master bedroom suite renovations and family room additions are also usually good investments.
FIRST-TIME TIP: How much you should pay for the seller's improvements is ultimately determined by the market value of the property. Find out what similar properties are selling for in the neighborhood. It's conceivable that a seller's improvements might create a property that is worth more than the seller's cost of the house, plus the cost of the improvements. This would be the case if a functionally obsolete property is turned into a high demand house.
In addition to making sure that you're paying fair market value for a renovated property, make sure that you're getting your money's worth for the improvements. Ask for copies of the city building permits and for copies of architectural plans and invoices, if they're available. These will come in handy when the time comes for you to sell.
THE CLOSING: The best buys are usually remodeled houses where the sellers did a top-notch job for themselves, as opposed to renovations completed by a developer. Contractors who buy a house to fix up and resell will add a profit margin to the sale price and they often use cheaper materials.
Dian Hymer's column is syndicated through Inman New Features. Send questions and comments care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif. 94618.